What Is Gift Letter For Mortgage And How To Use It (2022)

Gift letters are something you should be aware of if you’re going to give or receive a significant financial gift since lenders will check your financial accounts when you apply for a loan as part of the underwriting process in order to verify your income and assets.

They’ll want to make sure you have the resources to repay the loan before they authorize any kind of funding, though. it could be your last chance of having your mortgage loan authorized if you just received money from family or close friends to utilize as a down payment on a new property.

It is explicitly clarifies that money received from a friend or family is a gift, it is a piece of official writing from the recipient. It is a significant, official piece of legal paperwork that can assist in establishing how much money—usually quite a bit—was given to you as a gift.

it is a legal document that attests that the funds you are utilizing as a down payment on a home loan were provided to you as a gift. No expectation of payback is included in the gift letter, which was prepared by the giver.

You must present a gift letter to demonstrate that money received as a gift will not be used as collateral for a loan if it will be put toward a down payment on a home or closing expenses.

The purpose of this article is to explain what a gift letter is, how and why you could use it for a mortgage, the type of gift letter, how a gift letter can affect your tax, and its template.

READ MORE: 10 Ways How to prepare for a Recession In USA

What Is A Gift Letter

A sale, trade, or other transfer of property from one person to another is known as a gift, according to a simple definition, the following list contains typical gifts: Transferring ownership of stocks or real estate without obtaining anything in return, cash, cheques, or other tangible assets. Forgiving debt.

A gift letter is now defined as a formal statement stating the funds(money) you have been given are gifts, not loans, and that the giver has no expectations that you would repay the funds.

Gift letters can refer to any present, made for any reason, but they are most frequently utilized when obtaining a mortgage to purchase real estate. It is required to show that money received as a gift is not a loan when you are purchasing real estate and want to put it toward closing costs or a down payment on a mortgage. Lenders may examine a loan applicant’s financial situation throughout the mortgage loan underwriting process to ensure they have the resources to repay the loan.

Take the scenario where you recently got married and received $5,000 from your grandparents as a wedding present. You can put this money toward a down payment and closing fees, but you’ll need to satisfy your mortgage lender that it wasn’t a loan in order to do so.

To achieve this, you need to have a gift letter created by your grandparents that you can then present to a mortgage provider. It will describe the giver’s relationship to you, the sum given as well as its source, and it will also make it clear that you have no duty to return the money.

Gift letters can be given for estate planning or with a gift of equity, although they are most frequently given with mortgage down payments. When a home is sold for less than market value, an equity gift letter is included. This frequently happens when someone gives real estate to a family member.

RAED MORE: Top 10 Banks Offering Instant Loans In Nigeria (2022)

Top 10 Ways To Earn In Dollars In Nigeria

Types of Gift Letter

1. Mortgage Gift Letter
2. Estate Planning Gift Letter
3. Parental Gift Letter
4. FHA Gift letter
5. Money Gift of Equity Letter

1. Mortgage Gift Letter

A mortgage gift letter certifies in writing that the real estate is being given as a gift rather than being borrowed against and subject to repayment. It must be made clear in the letter who is making the gift, where the money is coming from, and how the donor and beneficiary are related.

You may save time and lower the possibility that your loan will be declined by using a mortgage gift letter. Purchasing a home may be stressful enough; if you also have to run about trying to show that you received a gift of money at some point, you can miss out on your dream forever home.

2. Estate Planning Gift Letter

A gift letter might be a useful backup to keep on hand if you were given a significant hug financial present that you don’t expect to ever have to repay. It may be included in your estate planning paperwork, and you should keep it somewhere safe, where it is simple to get to, and where it is always available.

Your gift letter is still a great approach to protect yourself, even if you’re not sure at the moment if you’ll need to use it. Proving that money was given to you is the last thing you want to deal with when buying a house or attempting to get any kind of property. For estate planning considerations, having a gift letter is a great approach to avoid any future funding-related issues that aren’t essential.

3. Parental Gift Letter

Most parents concur that they desire to offer their children more than they have ever received. A money gift letter is a wise thing to ask your parents to add with their kind financial present if they are motivated to give you money to improve your financial future.

4. FHA Gift letter

Perhaps you’re aiming for a certain loan, like an FHA loan. The Federal Housing Administration (FHA) insures loans that are made by lenders that have been approved by the agency. They can accept certain weaker rules for approvals because they were made to meet the requirements of borrowers with lower to moderate incomes. However, even if you get money as a gift to use as a down payment, an FHA lender would probably still want documentation that it was a gift.
All presents from relatives are allowed for a single-family Federal Housing Authority (FHA) loan, with the exception of cousins, nieces, and nephews. For low- and moderate-income families or first-time homeowners, gifts are also accepted from companies, labor unions, close friends, charity organizations, governmental agencies, or public entities.

5. Money Gift of Equity Letter

Count your blessings and be wise about your next steps if you’re one of the fortunate people who stumbled into the uncommon possibility of a family member or close friend selling you a home at a price far below market value.

The discrepancy between the sale price you paid and the actual fair market value might be explained in a gift of equity letter. The difference is what is referred to be a gift of equity, and you can be named as the recipient in a letter.

The only prerequisite for gifts under the Departments of Veterans Affairs (VA) and Agriculture (USDA) is that the donor cannot have a financial stake in the transaction. For instance, the donor is not permitted to be the vendor, builder, developer, or real estate agent of the property being bought.

How To Use A Gift Letter

A template may be preferred by some mortgage lenders (or other financial institutions) even if gift letters have a pretty common format.

Generally, it must be written and signed by the person presenting the gift. However, this doesn’t always happen, and the letter may be prepared and signed at a later time. Ideally, they should deliver the gift letter at the time of the present.
Mortgage lenders will have a template on hand or you may get one online because it’s a very typical component of the mortgage screening process.

what is needed for a gift letter?

Yes, if you’ve got a sizable quantity of money as a present from relatives or friends, having a gift letter is perfect. However, it could be unhelpful if it isn’t precise about how it’s organized and what information is contained. Make sure the following is in your gift letter:

• The precise amount of the donation
• Name, address, and contact information for the donor
• Relationship between the donor and the loan applicant
• The date on which the money was or will be transferred.
• An indication that no payback is anticipated
• The location of the asset being acquired (if known at the time)
• Signatures of the giver and recipient

Ask them what information they need if your mortgage lender doesn’t provide you with a template. Should this not happen, your application may be delayed.

Keep in mind that your mortgage lender may investigate the gift’s conditions and may want further information or proof. Bank statements, copies of checks, and wire transfer documentation may be included in this. This analysis is carried out in order to confirm your financial condition, evaluate risk, and make sure you can pay back the loan you are using the gift money for.

It is possible to apply more than one gift toward your down payment, but you will need a different gift letter for each one.

Does the Giver of a Gift Letter Have to Be Family?

No, it’s not necessary for a gift letter to come from a relative. It may also come from a close friend, provided that it is obvious that you two have a really deep and intimate bond.

It’s important to keep in mind that while a gift letter by itself is a good place to start, certain lenders could ask for more details to make sure the funds or properties are truly gifts. To confirm the donor has sufficient funds to gift you, they can ask to view the donor’s bank statements. Furthermore, they might even request a bank statement proving the transfer of funds.

Is a Gift Letter enforceable in court?

Yes, it becomes a legally valid document after the loan documentation is recorded.

How to Write A Gift Letter For A Mortgage

Writing a gift letter is not difficult. It’s typically a one-page document written in straightforward English that excludes the vast majority of legalese. You may easily develop it on your own because it might be really uncomplicated and easy.

The majority of mortgage companies will have a template you can use, but generally speaking, your gift letter needs to include the donor’s name, address, and phone number; their relationship to the client; the amount of the gift; the date the funds were transferred; a statement from the donor that no repayment is expected in return; the donor’s signature; and, if known, the address of the property being purchased.

Summary

A gift letter is a legal document that attests to the fact that whatever money you’ve received is a gift, not a loan, and that the donor has no expectations that you’ll pay it back. Gift letters can refer to any present, made for any reason, but they are most frequently utilized when obtaining a mortgage to purchase real estate.

According to the Internal Revenue Service, the yearly exclusion for a gift is $16,000 per person per year as of August 2022. Any sum above that will require the giver to submit a gift tax return and pay taxes.